The interest rates offered by all of the above lenders vary based on a number of factors including their assessment of the financial health of the borrowing company, the credit history of the directors, and whether the loan is secured against an asset or personally guaranteed by one or more of the directors.
In general, interest rates are also heavily dependent on the prevailing market conditions at the time or, in other words, the current Bank of England Base Rate and interbank lending rates (e.g. LIBOR). Banks offer both fixed rate loans and variable rate loans to businesses whereas non-bank lenders tend to offer just fixed rate loans.
Fixed Interest Rate Business Loans
With fixed interest rate loans the interest rate paid on the outstanding balance of the loan remains constant for the life of the loan. Since the Bank of England Base Rate (the rate at which banks borrow from the BoE) is at an historical low, there is little chance that rates will fall over the next few years.
Alternatives to Business Loans
There are a number of ways in which businesses can borrow finance without taking out a business loan.
Business Overdraft Facility
Business overdrafts work the same way as personal overdraft facilities with one important difference - rather than a single rate which applies to all borrowers, the bank will charge interest at a rate which depends on the business, as with a loan.
This interest rate also often varies with the Bank of England Base Rate or LIBOR. Banks can also frequently charge arrangement fees for overdraft facilities and overdrafts often need to be renewed annually.
Business Credit Cards
Credit cards are useful for businesses not only as a line of credit but to make spending both easier and more accountable. There is usually an annual fee for each credit card issued.
Cards operate in the same way for businesses as for consumers: interest free periods are available but interest rates tend to be much higher than rates on business loans. Rates of 20%+ APR can be common. Therefore, we believe that they can't really be classed as a true alternative.
Another form of alternative finance that has grown in popularity is cashflow finance, also known as invoice finance. This allows a company to borrow money from a bank (e.g. Barclays or BNP Paribas), or a specialist cashflow finance company, using the company's unpaid invoices as collateral.
Two forms of invoice finance in the UK are factoring and discounting. Invoice factoring involves the finance company taking over the borrower's sales ledger and collecting debts on their behalf. Invoice discounting sees the borrower remain in control of their sales ledger, paying the income to the finance company as it comes in.
Private Equity/Venture Capital
Both private equity and venture capital can be routes to securing cash to grow your business. Typically the cost of such cash is high when compared with bank loans and involves surrendering equity in the business.
On the other hand it can be the only route for securing very large sums and often comes with financial, legal and business expertise that can be invaluable for making the transition from SME to large business.
Government Grants and Schemes
The UK government funds a number of schemes which provide finance for startups and small to medium sized businesses. These can help businesses clear many of the hurdles to acquiring finance by, for example, providing a government guarantee for business loans. A tool on the government website allows businesses to search for suitable schemes.
How to get a Business Loan
Applying for a business loan is a process that should be approached carefully and methodically. The stringent conditions that can be insisted upon by banks mean that accurate paperwork is a must. It should also be borne in mind that unsuccessful applications can have a deleterious effect on a person's credit score.
Before applying, a potential applicant should make a thorough survey of the deals available to them. Getting quotes from lenders is possible without going through the full application process and so borrowers should obtain a variety of quotes to compare.
Small business owners might also consider enlisting the help of an Independent Financial Adviser.
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